Japan’s Evolving Business Strategies
An Interview with Ulrike Schaede
By Laura Araki
May 7, 2012
After decades of economic stagnation, many Japanese corporations are facing challenging adaptation processes and are redefining their goals and core business strategies. Companies that were once famous for being successful models of the Japanese business world are finding themselves between two different paradigms. One is “Old Japan,” which is predicated on stability, even in the face of low performance, and the other is “New Japan,” which pursues competitiveness based on flexibility and fast maneuvering.
To better understand this new corporate climate and its impact on Japan’s economy, NBR spoke with Ulrike Schaede, Professor of Japanese Business at the University of California, San Diego. In this interview, Professor Schaede examines Japanese business strategies and global competitiveness.
How would you describe the business strategies of Japan’s major corporations over the past decade? Have these corporations tended to follow similar trajectories or have they developed their own individual policies?
The environment in which Japanese companies compete has completely changed. As is well known, in the postwar period (1950s to 1980s) Japan had a unifying vision. Simply put: import raw materials and new technologies, transform those into high value-added items by exploiting a cost advantage, and export. Industrial policies helped leading companies to grow and optimize mass production of high-quality products, so as to pepper the world with nifty gadgets and cars. So strong were the incentives that most companies moved in lockstep.
Since the 1990s, it has become painfully clear that this no longer works. Japan has lost its cost advantage to, and in consumer end products has met its quality equal in, other Asian countries. Japan can no longer compete in blow dryers and toasters. What is more, the previous industrial architecture—with its emphasis on stability through business groups, main banks, cross-shareholdings, and exclusive subcontractor tie-ups—has thwarted change. Add to this the arrival of price competition in retailing and the emergence of big-box retailers in the mid-1990s, and you get a completely new setting.
In the old days, what it took to win was size, as companies were rewarded for diversifying into many different business segments so that they could scale the value-added strategy. This is how companies like Hitachi or Panasonic ended up with several hundred subsidiaries, many in unrelated businesses. Today, what it takes to win is specialization and excellence in a few clearly defined core strengths, to build a competitive advantage over global competitors. Companies have responded to this realization in different ways, and this has resulted in a new variety of strategic approaches.
One way to categorize the new landscape is by differentiating between “old” and “new.” “Old Japan” companies are those that continue the old ways of being “too big to fail” (often expressed as “caring for our employees”), competing in many segments as also-rans, and hoping that nobody notices low performance. “New Japan” companies, in contrast, understand that stability is out and nimble maneuvering is in.
Some Japanese companies in the business-to-business (intermediate-product) sphere have always been specialized, and they are now joined by previous conglomerates that have embarked on a journey to “choose and focus”—the business catchphrase around the turn of the century, meaning to choose a limited number of businesses to operate in (and exit the others) and have a clear plan for how to compete globally in these businesses by focusing resources. How exactly they do this depends on each company, and what we get as a result is a new pluralism in Japanese corporate strategy. The New Japan category contains many different species.
For a full analysis of Japan’s economy today, we need to appreciate this change in landscape. Most newspaper reports focus on Old Japan companies. This is understandable, because those are the brands that people know from the 1980s, but it makes for an inaccurate impression of Japan’s competitive strength. Thus, the reporting is true but incomplete. It is as if an analysis of U.S. business were based exclusively on companies that were strong in the 1980s, such as Kodak, Chrysler, or Sears, to conclude that the U.S. has lost it. That may also be true, but then there is Apple and Google and so forth.
What we need to be looking at instead in Japan are companies that occupy the sweet spot in the global supply chain, namely producers of upstream (input) materials, fine chemicals, and production equipment that feed into end products we value so much, namely electronic gadgets that are assembled in Taiwan, South Korea, and China. Most of the Japanese input makers are not household names, so perhaps you wouldn’t know one if you saw one, but they are quite successful.
Have business strategies become more innovative in their approach or do they still reflect their original corporate cultural roots?
The answer to this question is both. Several aspects of Old Japan management practices are still valuable, such as loyalty to the organization and attention to detail, which translate into an ability to produce very complicated products (such as fine chemicals) at consistently high quality. The issue is how to keep these while also becoming quicker and more results driven. The New Japan companies I am studying are able to preserve these aspects, while also becoming more global, risk-taking, and performance-oriented.
Most large Japanese companies are “strong culture” organizations, partially because Japan is comparatively a strong culture country but also by design, cemented in lifetime employment and related human resource practices. It is what made them so successful initially. But what we know from business research is that age, size, and success—which are usually correlated—make for a toxic combo, and the stronger the culture the greater the resistance to change.
This is precisely why the choose-and-focus process is taking so long. It took IBM—also a strong culture organization, but in a much more fluid labor market setting—a decade to reposition strategically, and it is no surprise that it is taking large Japanese companies at least the same time. Some of them are making great strides, however.
What have been some of the more significant and unique changes to Japanese business practices in the past few years?
This could be a very long list, but if I have to pick one, I choose corporate governance. In addition to the rise of Asian competitors and new global competition, a great impetus toward strategic change was the shift in ownership structure of listed companies. As of 1989, some 70% of the shares listed on the Tokyo Stock Exchange were in the hands of domestic corporations, banks, and life insurers. The majority of these were “cross held,” meaning they were based on business ties and geared toward stability. Corporate governance—monitoring managers—was done informally or through the main bank, and usually did not really happen unless a company got itself into deep trouble. There was very little pressure on companies that were inefficient but stable. For a variety of reasons, these holdings have unwound. Now, foreigners hold about 27%, and a new category of “trust banks” hold 18%.
My current research suggests that both of these investor groups invest more in companies with higher return on investment, and a good proxy for this is profitability. Thus, managers now face strong pressures to show results. Better access to corporate information through more stringent disclosure rules, such as obligatory consolidated accounting, have also empowered individual investors. And there have been some reforms of the governance system itself, such as rules on outside directors.
It is important to note that this system is still developing, thus allowing some Old Japan practices to persist with impunity, as evidenced in the Olympus scandal. But there is uncertainty as to how long the old system will resist a true market for corporate control (i.e., hostile takeovers). So even though change may be slow in coming, the pressure on companies to show profits is real. Japan has always been a highly process-oriented place, yet now there is a sudden spotlight on results.
This performance pressure has begun to affect human resource management practices, subcontractor relations, and the role and logic of the main bank and business groups (which are becoming largely irrelevant, with the exception of the Mitsubishi group). I have analyzed these changes in detail in my book, Choose and Focus.
Japanese exports, especially in the electronics sector, have markedly decreased. What do you think are some of the leading causes of this decline?
While exports account for only some 15% of Japan’s GDP, for the past two decades it has been the export sector that has accounted for economic growth. It is true that exports have decreased in certain sectors, yet they have also increased in others, so this requires a more refined view.
In cars and electronics, the main explanation for declining exports is the location of production sites abroad (the process of “hollowing out,” kuudouka, that began in the 1980s). As of today, some 20% of Japanese manufacturing overall is located outside Japan (for cars, it is 51%; for electronics it is over 30%). When Toyota produces a car in Kentucky, that is no longer a Japanese export. When Bridgestone makes a tire in Thailand to sell it in India, that’s no longer an export for Japan. But of course the revenues and profits still accrue to the Japanese company. With the globalization of production networks, exports have become a poor measure for a country’s manufacturing prowess.
At the same time, as mentioned above, Japan can no longer compete in washers and dryers, or perhaps even TVs. So then how can exports be a source of economic growth? The answer is that Japan’s export composition has changed. What is mostly exported from Japan now are highly innovative, highly advanced parts and materials that feed into the making of electronics and cars. For example, Japanese companies combine to a 70% world market share in fine chemicals for electronics, and more than 60% of the machinery needed to make electronics parts such as LCDs. Japanese companies compete in the specialty steel markets, and they hold a 65%+ market share in carbon fiber (now used to make the Boeing Dreamliner, but soon probably also to be found in cars). I could add a long list of other examples. Exports in these upstream materials are growing. This is also reflected in the fact that Taiwan and South Korea have a growing trade deficit with Japan.
On a separate note, a lot has been made of the news that Japan’s long-standing run of a trade surplus has come to an end, and some have associated this event with a decline in electronics exports. But please consider this: any country that suffers from a nuclear disaster and is forced to replace some 30% of its energy consumption with imports would probably find itself with a trade deficit. Whatever decline there has been in exports has been greatly outdone by the huge recent rise in imports.
Amid a record poor performance in the past few years, including a loss of nearly half its stock value, the Sony Corporation has undertaken serious efforts to initiate an emergency recovery plan to revitalize their entire business strategy. Incoming CEO Kazuo Hirai is hoping to spearhead these initiatives, vowing that he will not be afraid to make “painful choices” for the future of Sony.
How do you see these changes playing out? What would you define as the root causes of Sony’s recent struggles? What do you see for the future of Sony?
There are many interpretations of what happened at Sony. Mine is that Sony’s story is one of delayed choose-and-focus, with the twist that Sony was originally a New Japan company. Under Norio Ohga and Nobuyuki Idei in the 1990s, the “age, size, success” combo began to bite. Over time, Sony had developed formidable silos (different segments and functions), with the engineering silo taking absolute reign.
The old adage is that when things go wrong, engineers and marketers will blame each other (“you didn’t build a product consumers want” versus “no, the product is superb, you just don’t know how to sell it”). Top management sided with the engineers. Globally, in Old Japan style, shots were called from Tokyo rather than from the market locations. Sony’s engineering talent went largely to waste, as the company was first to develop yet last to market in one cool gadget after another, from the e-reader to the tablet.
Arguably, Sony TVs are still the best, as is Blu-ray, yet many consumers will never know. The management structure also turned Old Japan, with alumni governance to boot: the outgoing presidents stayed in the background and kept empowering key people other than their successors. When Howard Stringer was hired in 2005 as CEO, Ryoji Chubachi, the chief engineer, was made president at his side. It was not until 2009 before Stringer could push Chubachi out. I submit that if all that infighting energy had instead been spent on pushing Sony’s brand, the company would be better off today. As it is, Sony is now in year four of choose-and-focus, as opposed to year eight. The Fukushima disaster, the Thai flood, and the hacker attack (which could happen to the best of people) did not help.
The upshot is that this is a story of structural incompetence of the Old Japan type. There is still a brilliant engineering company hidden under all the bureaucratic processes. The old players have exited. It is noteworthy that the non-electronic segments of Sony (music, movies, financial services) are all profitable. If Hirai is allowed to reign, and if he can push through some quick changes, the question before him is whether Sony should greatly cut, or rather push, electronics. I don’t envy him for this choice.
The next big battle for dominant design in consumer electronics is about our living room: What will be the central gadget that makes our houses intelligent (connecting all sound, video, Internet, and TV; knowing how old the milk is in your fridge and allowing your cell phone to check on this while you’re at the store; turning off the washer if there is a water leak)? Three formats compete for this dominance: a box, cable, and the cell phone. Sony, Apple, and Microsoft are betting on their boxes (Sony through its PlayStation technology); Samsung and others on the phone. Apple was trying to establish a foothold but its TV box was not prime time yet. This has extended the window of opportunity.
There are lots of “ifs” here. This could be yet another battle for dominant design that Sony may lose. If Sony can be fast to market and nail this one, Hirai will be a hero and appear on the cover of our various business magazines. If, on the other hand, Hirai chooses to greatly curtail Sony’s electronics business (e.g., by exiting the TV business), he may be lauded as a “refocus” agent, but he may lose out on the best opportunity to re-establish the Sony brand. Sony probably should compete in this next battle. After all the convoluted detours, the company may actually have what to takes to hit a home run.
Ulrike Schaede is Professor of Japanese Business in the School of International Relations and Pacific Studies (IR/PS) at the University of California, San Diego. She studies Japan’s corporate strategy, business organization, management, financial markets, and regulation. Her most recent book is Choose and Focus: Japanese Business Strategies for the 21st Century (Cornell UP, 2008).
Laura Araki is an Intern at the National Bureau of Asian Research and a senior at the University of Washington’s Jackson School of International Studies.
This interview was produced by the Japan-U.S. Discussion Forum, NBR’s public email forum on Japanese affairs.